Ran some tests on this a few different ways this morning. It appears to work fine when pfSense is set to use PAP or MD5-CHAP to the server, but fails when using MSCHAPv1 or MSCHAPv2. I've tried a few different ways to encode the values (UTF-8, UTF-16) and in varying places around the auth request but no luck so far.
It works using any method I've tried with radtest at the CLI, so it appears to be an issue either in the PHP RADIUS code (PEAR modules for Auth_RADIUS or the CHAP specific module(s)) or how it's called when pfSense forms auth requests with these types of passwords.
I created https://redmine.pfsense.org/issues/10352 to track it down eventually but at least at the moment I'm not seeing anything that looks like it would be a quick fix.